Controlled Burn – Palm and Soy Oil Demand Gain New Energy
The flood of global vegetable oil has slowed over recent months, courtesy of historically low prices and record biodiesel demand. Since April 2018, leading demand indicators such as POGO (the Palm Oil-Gas Oil price ratio) and the B-100 FOB Midwest vs on-highway Diesel price ratio have tilted in biodiesel’s favour. Biodiesel’s bargain status has accelerated global consumption of palm oil and soy oil, which account for over half of its feedstock. In 2019, Rabobank expects global vegetable oil demand growth of 3.5% and increased biodiesel mandates in exporters Brazil and Indonesia to set the stage for a lasting recovery in CBOT Soy Oil and MDE Palm Oil.
Two-year global vegetable oil glut under pressure
In the two years since El Niño drought cut through South-East Asia’s palm oil region, global vegetable oil supplies have ballooned by over 10%. Growth has been led by palm oil production in Indonesia and Malaysia, where overexpansion and increases in prime yielding palm trees combined to bloat global stocks by +25% from 2016. Today, palm oil accounts for half the world’s vegetable oil stocks yet only one-third of production. Global soy oil stocks also grew last year, particularly in the US (2017/18 +16% YOY), where record amounts of soybeans were crushed for soymeal to replace Argentina’s supply shortfall.
Heavy supplies contributed to MDE Palm Oil and CBOT Soy Oil 2018 price performances (down ~15% YOY) and drove discounts to Brent to four-year lows last October. That discount has narrowed recently amid a fall in Brent and the more supportive outlook for vegetable oil remains well below the five-year average. Looking ahead for 2019, Rabobank expects a permanent price rebound from 2018 lows on the confluence of slowing production growth, export constraints, and record biodiesel demand.
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